CGE modelling of the resources boom in Indonesia and Australia using TERM

The assumption of resource depletion, represented in the model as a 20% decline in crude
oil productivity, is based on a perception that globally, crude oil resource depletion is
moving ever closer. It might be that evidence of declining proven crude oil reserves in
Indonesia is symptomatic of low investment in exploration and extraction in the 1990s.
This was due to a combination of low crude oil prices at the time and the crisis of the late
1990s, in which investor confidence in Indonesia collapsed. It remains possible that with
renewed exploration and development of new wells stimulated by high oil prices,
Indonesia’s crude oil productivity will not decrease.

For the simulation, we used a long run closure. On the income side, this assumes that
national employment is fixed, and that all adjustment nationally occurs via changes in
real wages relative to the base case. Concerning capital stocks, in the long run we assume
that there is sufficient time for industry investment to respond fully to variations in
industry rates of return from the base case. Therefore, all adjustment in the long run is in
stocks of capital rather than rates of return on capital. On the expenditure side, we assume
aggregate consumption is linked to nominal GDP via a consumption function.
Government consumption is fixed. At the industry level, the investment to capital ratio is
fixed, thereby determining investment. We assume that the trade balance as a share of
GDP is exogenous.

Since we are using a multiregional model, there are several additional features in the
macroeconomic behaviour of the model that operate at the regional level. We assume that
migration between regions follows imperfectly elastic inter-regional demand for labour.
That is, there is a migration response to differences in real wages between regions, but
the response is not sufficient to eliminate inter-regional wage differences.

We present the results in separate columns for the two sets of shocks. We turn first to
explaining the change in real GDP.

Table 6: Indonesia’s national real macroeconomic impacts of energy price and resource
depletion shocks (% change from base case)

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